FASB may expand the use of fair-market values on income statements and balance sheets

[Slimprofits]

article by Jonathan Weil: http://www.bloomberg.com/apps/news?p...d=a5BsXz90CMso

FASB Board Meeting:

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.

July 15, 2009 Board Meeting

1. Financial instruments: improvements to recognition and measurement. The Board agreed to propose a model to improve financial reporting for financial instruments. The Board reached the following decisions:
The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost. For those financial instruments whose change in value is recognized in other comprehensive income, amortized cost will be displayed on the balance sheet in addition to a fair value adjustment to arrive at fair value.

2. The Board agreed to propose that changes in an instrument’s value may be recognized in other comprehensive income on the basis of qualifying criteria related to an entity’s management intent/business model and the cash flow variability of the instrument. The Board will provide additional guidance on how to apply those qualifying criteria. The Board agreed to propose that changes in value for derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, will be recognized in net income. The Board agreed to propose that for all financial instruments, interest and dividends will continue to be recognized in net income. Credit impairments, as well as realized gains and losses from sale and settlement, also will be recognized in net income. The classification of instruments will be determined at initial recognition of the instrument and will not be subsequently changed.

3. The Board agreed to propose to require one statement of financial performance with subtotals for net income and other comprehensive income. It also agreed to propose to continue to only require earnings per share for net income.

http://www.fasb.org/cs/ContentServer...=1176156351499

(I first saw this on Barry Ritholtz's blog)

[thedanimal]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Unless I'm reading this wrong, I'd say this is a positive development.

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Unless I'm reading this wrong, I'd say this is a positive development.

Agreed. Bloomberg's headline - Accountants Gain Courage to Stand Up to Bankers made me think of EJ's Jocks and Geeks.

[icm63]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Looks like Accountants are loading there water pistols...

Shame, the need a shot gun !

[jiimbergin]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Looks like Accountants are loading there water pistols...

Shame, the need a shot gun !

Latest article on Mark to Market.
http://www.bloomberg.com/apps/news?p...d=a04oVutXQybk

Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.
So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”
While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.
The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.
Recognizing Loan Losses
The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.
While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.
Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.
Widening Gaps
The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.
Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.
When a loan’s market value falls, it might be that the lender would charge higher borrowing costs for the same loan today. It also could be that outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment.
The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index, including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

I'm having a hard time wrapping my head around the various FASB documents, but it seems big. Really big.

http://www.fasb.org/cs/ContentServer...=1176156422130

Accounting for Financial Instruments Summary of Decisions Reached to Date
As of September 23, 2009

Measurement of Financial Instruments and Reporting Changes in Their Fair Value All financial instruments would be measured at fair value with all changes in fair value recognized in net income unless the following criterion is met...

http://www.fasb.org/cs/ContentServer...=1175801889654

Next Steps/Project Plan

The Boards will continue to develop a comprehensive model for accounting for financial instruments, including hedge accounting. The Boards plan to deliberate the issues relevant to this project separately and then meet subsequently to reconcile differences in their technical decisions.

FASB Project Plan

The FASB expects to issue one Exposure Draft that addresses the measurement, classification, and impairment of financial instruments, as well as hedge accounting, by the end of this year or early 2010. The Board considered approaching the project in several phases and issuing multiple exposure documents. However, the Board believes that these issues are interrelated and that its comprehensive approach will result in requirements that are more coherent making it easier for constituents to react to and understand. For example, the Board is considering various impairment models and the possibility of selecting one of those impairment models for all financial instruments. The Board’s decision on impairment depends on the overall classification and measurement model for financial instruments as the classification and measurement model will influence the relevance and cost/benefit of each impairment model. The Board must also consider overlapping issues with respect to hedge accounting. In addition, a comprehensive approach to accounting for financial instruments may also reduce the possibility of entities having to change their accounting policies and systems on several occasions.

The FASB has posted to its website a detailed description of its tentative approach to classification and measurement of financial instruments (see Summary of Decisions Reached to Date) as a way of informing interested constituents and obtaining early input from them. The FASB will continuously update that description as the Board makes additional decisions. The FASB will consider input received on its tentative model as well as feedback received on the IASB’s Exposure Draft as it develops its Exposure Draft.

FASB Project Plan (as of September 29, 2009) - http://www.fasb.org/cs/ContentServer...=1176156416480

FASB goal is to issue final accounting standards update in late Q3 / early Q4 2010.

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

The American Bankers Association latest salvo. This is an accerpt from Yingling's testimony in support of the House Democrat / Obama Too Big Too Fail oversight bill:

http://www.aba.com/NR/rdonlyres/222C...ReformHFSC.pdf

October 29, 2009

A Systemic Risk Oversight Council could not possibly do its job if does not have oversight authority over accounting rulemaking. This is a major deficiency in the draft legislation. Accounting policies are increasingly and profoundly influencing financial policy and the basic structure of our financial system. Thus, accounting standards must now be part of any systemic risk calculation. To do anything less creates the potential to undermine any action taken to address a systemic risk.

[..]

In light of FASB’s current plans to expand mark-to-market accounting, let me make one final comment on accounting policy: For the last year, ABA has continued to make this fundamental point: the broad use of mark-to-market accounting is simply incompatible with a banking system that provides long-term credit to businesses, consumers, and others...

[..]

Simply put, if FASB continues its effort regarding mark-to-market, the lesson learned from this financial disaster will be that longterm loans and investments will have their valuations destroyed, and therefore the bank will be destroyed, by mark-to-market accounting during financial panics.

[..]

Despite this, FASB currently is proposing to expand mark-to-market accounting so that individual loans will be reflected on the balance sheet at their so-called market value. Loans currently make up over 60 percent of bank assets and are, by their nature, illiquid. Given the problems faced this past year with illiquid securities, such changes would wreak havoc in the markets due to the enormous volatility being introduced to bank capital. This volatility will increase the cost of funding and, as a result, banks simply will not be able to make loans and investments with the idea that they will work through hard times with customers and communities.

I simply can't imagine the ABA being defeated on this one. They're pulling out the big guns.

Who is right and who is wrong on this, FASB or the ABA? Is there another path that is better?

[MulaMan]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Banks are not like other business that simply produce stuff and so do not need to follow any laws. They can self-regulate.

[icm63]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Banks are not like other business that simply produce stuff and so do not need to follow any laws. They can self-regulate.

Thanks goodness !

I am going to tell my little Johnny to to be a banker based on this analysis !

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

http://www.cato.org/pub_display.php?pub_id=9758

Cato Institute position paper on Mark to Market

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

And lining up against the Bankers:

CAQ Wants Congress to Preserve SEC Oversight of FASB
WASHINGTON, D.C. (NOVEMBER 4, 2009)

CAQ executive director Cindy Fornelli, and the leaders of the Council of Institutional Investors and the U.S. Chamber of Commerce, have penned a letter to Chairman Barney Frank, D-Mass., and other leaders of the committee and a key subcommittee. They are concerned about recent proposals to put FASB beneath the oversight of a so-called “systemic risk regulator” as part of a broad overhaul of the financial regulatory structure.

“Efforts to place oversight of, or significant influence on, FASB in another entity whose primary focus is not to serve the interests of investors and the capital markets run the risk of impeding FASB’s ability to promulgate and issue standards for financial reporting that faithfully represent the economic activity of business transactions and provide information that meets the needs of investors and companies for all sectors of the economy,” they wrote. “By placing FASB under the jurisdiction of a structure charged with managing systemic risks to the financial markets, accounting rules will be viewed though the narrow lens of a few large companies from specific industries, rather than considerate of the applicability of financial reporting policies to over 15,000 public companies.”

71% Of Senior Financial Executives Say That FASB Should Set U.S. Accounting Standards
Thu Oct 29, 2009 6:00am EDT

In a national survey of U.S. CFOs and senior comptrollers conducted by Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, the majority (71%) believe that the Financial Accounting Standards Board (FASB) should set U.S. accounting standards, not the SEC, the International Accounting Standards Board (IASB) or the U.S. Congress.

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

http://www.nytimes.com/2009/11/06/bu...rris.html?_r=1

...The Sarbanes-Oxley law also took steps to reinforce the independence of the Financial Accounting Standards Board, which writes accounting rules in the United States. By giving the board a secure source of financing, legislators said they were protecting it from the threats of the companies that had previously made donations to keep the board functioning.

But this Congress has made clear that independence for the accounting rule writers can go too far — particularly if the rules force banks to reveal the horrid mistakes they previously made...

[Slimprofits]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

http://online.wsj.com/article/BT-CO-...6-716484.html#

WASHINGTON (Dow Jones)--Several financial and housing trade groups are urging lawmakers to support an amendment to give a proposed systemic-risk council the power to change an accounting rule it has judged a threat to the financial system.

The amendment would give the council the power to override the Securities and Exchange Commission, which currently has final say on accounting matters.

[..]

The amendment will be offered as soon as Tuesday, after the Financial Services Panel resumes debate on a sprawling financial-overhaul bill to wind down large firms that pose a threat to the economy.

The amendment, sponsored by Reps. Ed Perlmutter (D., Colo.) and Frank Lucas (R., Okla.), comes after "mark-to-market" accounting rules drew fire last fall from critics who said they exacerbated the financial crisis.

[..]

Under the amendment, a new council of regulators could recommend that the SEC modify or suspend an accounting rule or procedure if a majority of the council agrees such action is necessary to avert a threat to the financial system. If the SEC fails to implement the recommendations, the council could force FASB to make the changes.

The Treasury, the Securities and Exchange Commission, the federal banking regulators, the Commodity Futures Trading Commission, the Federal Housing Finance Agency and the National Credit Union Administration would all have seats on the council.

Opponents, including the SEC, FASB and the U.S. Chamber of Commerce, say the amendment would strip FASB of its independence, wrecking market confidence in accounting rules.

The groups disputed this in their letter, saying the amendment preserves FASB's independence and gives the council authority to act on an accounting issue only if the SEC fails to do so. FASB, which is overseen by the SEC, is the U.S. account-standards setter.

The American Bankers Association, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the Financial Services Roundtable, the National Multi Housing Council, the National Apartment Association, the National Association of Home Builders and the Real Estate Roundtable signed onto the letter.

Other opponents of the amendment include the American Institute of Certified Public Accountants, the California Public Employees Retirement System, or CalPERS, and the CFA Institute.

[icm63]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Accounting rules just became political...I BET LOBBYING on this was well funded by the banks.

The specialists in there field cant apply their rules

The FIRE economy populists are winning, investors are losing.

The next law change will be to economics and reporting of govt statistics the government doesnt like.

M3 - stopped
Unemployment rate - stop reporting thatf for god sake.

Or stopping using property valuations rules the govt doesnt like.

[goadam1]

Re: FASB may expand the use of fair-market values on income statements and balance sheets

Accounting rules just became political...I BET LOBBYING on this was well funded by the banks.

The specialists in there field cant apply their rules

The FIRE economy populists are winning, investors are losing.

The next law change will be to economics and reporting of govt statistics the government doesnt like.

M3 - stopped
Unemployment rate - stop reporting thatf for god sake.

Or stopping using property valuations rules the govt doesnt like.

Now you get it.